Guy Gottfried: Needles in a Haystack

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And we’re off…
Canadian value investor and old friend of Wyatt Investment Research Guy Gottfried is the first speaker on Day One of the Value Investing Congress. Gottfried has run Rational Investment Group for five years, and has been a Value Investing Congress regular. His picks at the conference have averaged an incredible 60% return.
His latest picks are centered around one key theme: finding small-cap bargains at a time when most large-cap stocks are up. “Finding needles in a haystack,” he calls it.
His first pick? GLENTEL Inc. (TSX: GLN) — $331 million market cap
Glentel is a Canadian-based retailer of wireless products and services that is the largest  multi-carrier retailer in Canada and Australia, and the second-largest Verizon retailer in the U.S. Most of its profits come  from wireless carrier payments, not subscriptions.
Here are some other notes about GLENTEL:

  • It trades on the Toronto stock exchange at $14.75 to start the day
  • Its market cap is $331 million
  • It’s VERY cheap – GLENTEL trades at just 7.5 times free cash flow
  • It pays a generous dividend – a 3.4% yield. Better yet, that dividend is growing at 20% a year since 2007.
  • A recent acquisition of rival Wireless Zone, in December 2012, is only now starting to contribute to the company’s bottom line.
  • Other recent acquisitions include AMT (Australian Operation)— a solidly profitable wireless carrier.
  • Operates wireless kiosks in Costco’s Canadian stores. Just established similar deals with Canadian Targets and BJ’s.
  • AMT is entering countries in Southeast Asia, which should contribute to future growth.
  • Even without future growth, GLENTEL has enough cash on hand and ongoing free cash flow for debt repayment to help boost the stock price on their own.

Gottfried’s second “needle in a haystack” is Supremex (TSX: SXP).
Supremex is Canada’s largest envelope manufacturer. With a 60% market share, it’s the only player with a national presence. Admittedly, it’s in a declining industry, but that’s offset in part by aggressive cost-cutting.
Other reasons Gottfried likes Supremex:

  • It’s DIRT cheap: trading at 3.1 times free cash flow – an “anomalously low” valuation for a company that’s not in financial distress, Gottfried said.
  • A 7.5% dividend yield, despite a payout ratio of just 23%.
  • It’s cheap because it’s a small and illiquid stock with sparse coverage by one sell-side analyst. Supremex also cut its dividend by 90% a few years ago – a move that has depressed the stock price ever since (75% below pre-financial crisis levels).
  • Supremex is “using prodigious cash flow to drastically reduce debt.”
  • Cash flow “prodigious” enough that the dividend could double in the next few years.
  • Potential catalyst: the company may sell its two manufacturing facilities in Toronto and Montreal and lease them back.
  • Insiders with heavy ownership and a desire to optimize shareholder value quickly.

Gottfried concluded by tying his two investment ideas together. Both are cheap, both are focused on building the business in the long run.
While they are different in many ways, GLENTEL and Supremex are examples of how good investments “come in many shapes and sizes.”

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